Jim decided to start a Fulfilled By Amazon (FBA) business with a partner. It’s a big move and I don’t agree with it.
I’ve been hearing about FBA since I started online in 2013. A few of my friends started by launching products off of their niche sites. (Jim Horner is from the starting from scratch case study.)
It was a great move for them since it was like the wild west back then, so I hear. If you just showed up to the game, you could play and win. Now, it’s way, way more competitive. In addition, they were able to launch their products on their niche sites which is a great marketing channel.
I sat down with Jim and we talked about his new project. I was surprised and wanted to hear about it. Jim knew seasonality would kick in for his first niche site and started a second site. The thing is I don’t really agree with his approach. It lacks the focus that’s necessary when you’re starting a business.
It’s all about opportunity costs.
What is an ‘Opportunity Cost’
An opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is therefore most relevant for two mutually exclusive events, whereby choosing one event, a person cannot choose the other.
BREAKING DOWN ‘Opportunity Cost’
Using a simple example, if a farmer is able to pick five apples from an apple tree or five oranges from an orange tree but cannot pick both, he faces a mutually exclusive event. Then, if he decides to pick the apples, his opportunity cost is the five oranges he cannot pick. Using another example, if a gardener decides to grow carrots, his opportunity cost is the alternative crop he could have grown instead.
reference: Opportunity Cost Definition | Investopedia
Let’s go to the video and be sure to check out the rest below the video.
Is Starting an FBA Business a Mistake?
I’ll get right to it. Yes, it can be.
Unless you have plenty of capital to invest, starting an FBA business can be a mistake. The other issue is that if you have other projects in place, for example a niche site, then you’ll likely be spreading yourself thin.
- Is it fun to learn about new business ideas? Yeah!
- Is it even more fun to implement the ideas? Of course!
- Is it impressive to be able to send a link over to friends and family to show them you’re an Amazon Seller? You bet!
However, if you have a niche site that isn’t getting consistent traffic and making consistent revenue, then you have to think about the opportunity cost of spending time on things that aren’t your niche site.
What Are The Opportunity Costs?
Back to opportunity costs and what they might be for the $0 to $2,000 case study.
This is a thought exercise based on big assumptions.
Upfront, it’s clear that Jim can work on two projects at once, it’ll just take longer to finish on each one. It’s not a completely mutually exclusive scenario. Each project will take longer when you work on them in parallel versus if you just worked on one project at a time.
Jim worked on the FBA project instead of the Niche Site Project so the opportunity cost is what he isn’t earning on the Niche Site. And this goes for the money that is invested in FBA products too. But it’s possible and maybe likely that the FBA project will be more profitable so we need to look at that, too.
Opportunity Costs: The Niche Site Side
It probably cost Jim about one month of work on the niche site. So he could have published 10 more guest posts and maybe 30 more posts. It’s hard to estimate, but those are reasonable assumptions. Any revenue generated from those activities wouldn’t show up for a month or maybe more.
But once they start making money, each post could generate tens or hundreds of dollars a month. If you assume a conservative valuation of 20 times the monthly revenue of a given post, then you have a chunk of money.
Let’s say 10 of the posts of the 30 will make $20 per month. That’s $200 per month so that’s an additional value of $4,000 over the next 3 months. In 12 months, that could be more like $12,000 plus the $2,400 in monthly revenue.
Kicking off the FBA may have cost Jim about 1 month of working time, but there is an ongoing cost, too.
Marketing and ordering more products will be a constant effort so I can see this as a 2 to 3 month slow down on the niche sites over the next 12 months. If more products are added, then it’s even more of an impact and launching more products is definitely in the long term plans.
Opportunity Costs: The FBA Side
We already said that Jim could have published more blog posts and more niche site content. Our assumption was maybe that would be worth about $4,000 in value over the next few months. What is Jim getting on the FBA project?
Let’s make the math easy and say that Jim spent $1,000 buying the products for the first run. He mentioned that the margins are running at 40% – meaning that the gross revenue is $1,667 and the profits are $667.
(Remember that Gross Margin Percentage = (Gross Profit/Sales Price) X 100.)
If the initial outlay was $10,000, then we can extrapolate and the gross revenue would be $16,667. The profits will be $6,667.
How fast can products be sold? Probably pretty fast. Spencer Haws sold about $4,400 worth of products in just 30 days. So, the product, niche, and cost of the product matters a lot in this, but let’s just say Jim can sell the products within 30 days.
That’s $666 of profit in 30 days for the $1,000 initial investment.
That’s $6,667 of profit in 30 days for the $10,000 initial investment.
Don’t forget that profit split with a partner or more likely reinvested into the business.
*I’m totally ignoring external factors like competition, issues with vendors, issues with the actual products, and so on…
It’s not that the FBA business model is bad. It’s that working on too many things usually screws things up and you feel like you can never catch up with what you need to do. I know because I’ve done it many times. (Here is an example…) I’ll probably do it again even when I try to NOT do it.
On paper, it looks like maybe the FBA business could be more profitable in the long term. It’s impossible to say with any degree of certainty.
Great Resources on Amazon FBA:
- Amazon.com FBA Page
- The Tropical MBA – The Amazon Gold Rush – One of my favorite podcasts. This is a great episode since the panel is filled with 3 experts: Greg Mercer of Jungle Scout, Brad DeGraw of Amazon Sherpa and Kiri Masters of Bobsled Marketing. This isn’t a thought exercise by people that don’t have first hand knowledge about FBA (like me!). They tell you the good, bad, and ugly about FBA. The most profound points to ponder were from Kiri Masters:
- “I think as much as we’ve framed Amazon FBA is this amazing platform, there are a few drawbacks. One of them is that you don’t own the customer. Amazon owns the customer. You don’t get their email address. You don’t get any right or ability to remarket to them at least digitally.”
- “The other big challenge that sellers might face is not understanding Amazon’s pricing model and the fact that you’re going to be paying a referral fee for the benefit of being on Amazon’s platform. That’s in most categories 15%. If you’re using FBA, then you’ll have the fulfillment costs of shipping your product to their warehouse, storing it there, then Amazon has all the handling and picking and pack fees. If you’re not careful with your margins and you don’t understand the full pricing model, then you can really get eaten up with all of the extra fees.”
- “I think that it’s important to not underestimate the amount of capital that you might need to get started. If you think about beyond samples, you’re placing a minimum order from a factory potentially. If you’re making any tweaks, then you need to pay for it like Brad said, a product packaging designer to come in, and then you want to have some stock reserved for giving away units in exchange for reviews. You want to have some money inside for running PPC traffic to your listing. It’s not a quick and cheap place to get started if this is your first time around the block.”
- And finally, this exchange is a good one:
- Kiri: “I’ve got a question for Brad and for Greg. What percentage of first products do you think fail for the new sellers? Do you think that most people get it right the first time around or a good percentage of people fail with their first product?”
- Brad: “It’s the bell curve. If you hold up your hand five, you’re going to have one rock star out of five products. You’re going to have one total dud and then you’re going to have three that are base hitters or a double. More than half the time, you’ll make money but it’s nothing to brag about. About one out of five, 20% of the time, you make more money and you sell more volume than you thought possible. That’s what we’re seeing.”
- Greg: “I think there is a certain amount of people that don’t do well their first time…”
- Empire Flippers Podcast: Business Model Showdown: Amazon Affiliate Vs. Amazon FBA – This is more of a thought exercise, but Joe and Justin adopt a position and hold a debate. I side with Joe on a lot of the points, but a few of the cons come down to a preference in how you want to run your business.
- Brand Builders Done-For-You FBA Service: This is a great service that takes a lot of guess work out of what to do when launching a product.
- Niche Pursuits and an FBA Case Study: Spencer does a great job on this long term case study. He makes it sound super easy! So don’t forget that Spencer has access to some pros that give him advice and he’s a veteran internet marketer, too. That isn’t exactly clear in the posts and podcasts. Here is the FBA section of Niche Pursuits.
- Empire Flippers Blog: Amazon FBA Business Explained – This post goes through the pros and cons of the FBA business model. It’s thorough and gives a great background on the concepts.